by Matt Frankel, CFP | Aug. 8, 2019
Late payments and maxed-out credit cards can obviously hurt your credit, but that's just the start.
When you think of things that can hurt your credit, what comes to mind? Paying bills late is one obvious answer, and you might think of things like maxing out credit cards as well. However, that's only the start of the list. There are more than a dozen ways you could potentially damage your credit score, so read on to find out what they are.
This is the most obvious example of what can hurt your credit score, but it's worth mentioning. Your payment history makes up 35% of your FICO® Score -- the most heavily weighted category -- so it's extremely important to get this right. If not, it really doesn't matter if you keep your credit card balances low, only apply for new credit occasionally, and exhibit other responsible credit behaviors. With recent late payments on your credit report, you will not have a top-tier credit score.
A Federal Reserve study found that roughly 1 out of every 5 credit reports contain errors, and in many cases, these errors were so severe that they adversely affected the consumer's credit profile.
So one smart step is to check your credit reports from all three major credit bureaus (Equifax, Experian, and TransUnion) on a regular basis to make sure that you recognize all accounts and credit inquiries, and that things like your payment histories are accurate.
If you didn't know, you are legally entitled to a free copy of your credit report from each credit bureau once per year. To get yours, the official method is to go to www.annualcreditreport.com.
If you don't pay your bills for several months (90 days or more seems to be a common timeframe), your creditors will often charge-off your account, which means that they are writing off the debt as uncollectible. When they do this, they may also sell your account to a collection agency, a company that typically pays pennies on the dollar in exchange for the right to collect your debt.
Not surprisingly, these types of accounts can be devastating to your credit, especially when they're relatively new. Collections and charge-offs should be avoided at all costs, but if you do have some, doing damage control can be a very productive use of your time.
Another route a creditor can take is to sue you for a delinquent balance. If this happens, or if you have any legal judgements against you for other reasons, they can adversely affect your credit score. If a creditor takes legal action, the best thing to do is to attempt to resolve the account before a legal judgement is issued.
The second most influential category of information that makes up your FICO® Score is the amounts you owe. This doesn't necessarily mean the dollar amounts of your debts -- a $1,000 debt isn't inherently worse than a $500 debt, after all.
One of the biggest factors in this category is your revolving credit balances relative to your available credit. Most experts suggest keeping your credit utilization below 30% of your limits, and high utilization such as a maxed-out credit card can be devastating.
Here's one that may sound counterintuitive. If you close an old, unused credit card, your credit score could take a hit. The reason is the "amounts owed" category that I just mentioned -- by removing that account, you're lowering your available credit. So your existing debts will represent a higher percentage of your available credit, which could adversely affect your credit score.
On a similar note, if your credit limits are lowered, it can reduce the amount of credit you have available, which will raise your utilization percentage.
For example, if you have a $1,000 balance on a credit card with a $4,000 limit, you're using 25% of the credit available to you. If your issuer decides to lower your limit to $2,000, your utilization jumps to 50%. Generally, creditors won't do this for no reason or without warning, but it can happen.
Although it's one of the smaller categories of information that makes up your FICO® Score, "new credit" still accounts for 10% of the information in your credit score. Furthermore, the length of your credit history, which includes a variety of time-related metrics, makes up another 15% of your score.
So when you open new accounts, it can adversely affect both of these FICO information categories. The obvious effect is the "new credit" category -- and although it's unclear just how "new" an account has to be to hurt you in this category, the effect will be less as the months pass after you open it.
In the length category, one of the key metrics used is the average age of your credit accounts. When you open a new account, it drags your entire average down, so your score can be adversely affected in this way.
Under normal circumstances, your utility and healthcare providers don't report your accounts to the credit bureaus. However, if you don't pay them, they will send your account to collections, in which case it will be reported on your credit.
I already mentioned the new credit category of information, which makes up 10% of your FICO® Score. This contains two main items -- new credit accounts that you open, and the times you apply for new credit (known as credit inquiries).
Credit inquiries stay on your credit report for two years, but the FICO formula only considers credit inquiries from the past year. Any single credit inquiry is unlikely to cause a drop of more than a few points, but many inquiries in a short amount of time can have quite an adverse effect.
It's also worth mentioning that there are special rules when it comes to shopping for a mortgage or auto loan. In these specific cases, as long as all of your credit applications take place within a two-week "shopping period," they will be considered as a single credit inquiry for scoring purposes.
Perhaps the least-known category of information that makes up your FICO® Score is your "credit mix," which accounts for 10%. In a nutshell, this refers to the diversity among accounts on your credit report. In other words, if you have a mortgage, auto loan, credit card, and home equity line of credit, it could score more favorably than if you just had five credit cards in good standing.
The idea here is that lenders want to know that you can be responsible with all different types of credit, not just one or two. According to FICO, this category is most important for younger credit histories, or those without much other information that can be used in scoring.
When you cosign a loan or credit account for someone else, you're accepting legal responsibility for making the payments. In other words, it becomes a credit obligation, just like any of the accounts that are only under your name.
As a result, the account you cosign will almost certainly appear on your credit report as well as that of the other account holder. If that individual makes their payments on time every month, the cosigned account could ultimately help your credit score. On the other hand, if the person who is supposed to make the payments develops a habit of being late, being a cosigner could have a negative effect on your score.
Transferring a balance from one credit card to another isn't necessarily a negative catalyst for your credit score. However, it depends on the circumstances.
One common practice is to open up a new credit card with a 0% APR balance transfer offer and transfer all of your existing credit card balances to this account. This can effectively create a maxed-out credit account, which can be bad for your score.
Finally, child support is a legal obligation. If you owe child support and pay it as you're supposed to in a timely manner, it won't hurt you. On the other hand, delinquent or unpaid child support can adversely affect your credit score.
While I've tried to discuss the most common things that could send your credit score down, there are other possible situations that can have a negative effect on your credit score as well.
The best way to avoid negative surprises is to have a strong knowledge of how the FICO credit scoring formula works. By understanding the information that makes up your FICO® Score and how it is used, you can not only avoid negative FICO catalysts, but can use this knowledge to maximize your credit score over time.
As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.
But with so many cards out there, you need to choose wisely. This top-rated card offers the ability to pay 0% interest on purchases into 2022, has some of the most generous cash back rewards we’ve ever seen (up to 5%!), and somehow still sports a $0 annual fee.
That’s why our expert – who has reviewed hundreds of cards – signed up for this one personally. Click here to get free access to our expert’s top pick.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.